The S&P 500 ESG Index

The S&P 500? ESG Index:

Integrating Environmental, Social, and Governance Values into the Core

Contributors

Reid Steadman Managing Director Global Head of ESG Indices reid.steadman@

Daniel Perrone Associate Director ESG Indices daniel.perrone@

EXECUTIVE SUMMARY

The S&P 500 ESG Index aligns investment objectives with environmental, social, and governance (ESG) values.

It can serve as a benchmark as well as the basis for index-linked investment products. The index's broad market exposure and industry diversification result in a return profile similar to that of the S&P 500.

The index uses the new S&P DJI ESG Scores (see page 4) and other ESG data to select companies, targeting 75% of the market capitalization of each GICS? industry group within the S&P 500.

The S&P 500 ESG Index excludes tobacco, controversial weapons, and companies not in compliance with the UN Global Compact (UNGC). In addition, those with S&P DJI ESG Scores in the bottom 25% of companies globally within their GICS industry groups are excluded.

Our methodology results in an improved composite ESG score compared with the S&P 500. This holds true in all industries.

INTRODUCTION

An increasing number of investors require indices that are aligned with their investment objectives and their personal or institutional values. The S&P 500 ESG Index was designed with both of these needs in mind.

The S&P 500 ESG Index is broad and constructed to be part of the core of an investor's portfolio, unlike many ESG indices that have preceded it, which were thematic or narrow in their focus. By targeting 75% of the S&P 500's market capitalization, industry by industry, the S&P 500 ESG Index offers industry diversification and a return profile in line with the U.S. largecap market.

Yet the composition of this new index is meaningfully different from that of the S&P 500 and more compatible with the values of ESG investors. Exclusions are made related to tobacco, controversial weapons, and compliance with the UNGC. Furthermore, companies with low ESG scores relative to their industry peers around the world are also excluded. The

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The S&P 500 ESG Index

April 2019

The S&P 500 ESG Index is constructed to be part of the core of a portfolio...

...unlike many previous ESG indices, which were thematic or narrow in their focus.

The objectives of the index are to provide a similar risk/return profile to the S&P 500...

...and to avoid companies that are not managing their businesses in line with ESG principles.

result is an index suitable for investors moving ESG from the fringe of their portfolio to the core.

KEY OBJECTIVES

The methodology of the S&P 500 ESG Index was constructed with two objectives:

To provide a similar risk/return profile to the S&P 500; and To avoid companies that are not managing their businesses in line

with ESG principles, while including companies that are.

These two objectives run somewhat counter to each other. Eliminating companies from the S&P 500 necessarily changes its performance. But with further methodological adjustments, the industry composition of the S&P 500 ESG Index is brought back into general alignment with the S&P 500.

METHODOLOGY SUMMARY

Exclusions

Companies are eliminated that:

Produce tobacco, have tobacco sales accounting for greater than 10% of their revenue, derive more than 10% of their revenue from tobacco-related products and services, or hold more than a 25% stake in a company involved in these activities;

Are involved in controversial weapons, including cluster weapons, landmines, biological or chemical weapons, depleted uranium weapons, white phosphorus weapons, or nuclear weapons, or hold more than a 25% stake in a company involved in these activities;

Have a UNGC score that is in the bottom 5% of scores in the eligible universe;1,2 or

Have an S&P DJI ESG Score that is in the bottom 25% of scores within their GICS industry group in the S&P Global LargeMidCap and S&P Global 1200.

1 The UNGC, which was established in 2000, commits it signatories--companies and nations from around the world--to abide by principles related to human rights, labor, the environment, and anti-corruption. For more information, see .

2 Calculated by Arabesque.

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Exhibit 1: The S&P 500 ESG Index Summary

Objective: To target 75% of the market capitalization within each GICS industry group of the S&P 500, using the S&P DJI ESG Score.

Index Construction Example

Step 1:

100%

Exclude companies involved in tobacco or

controversial weapons, or with a low UNGC

90%

score.

Step 2:

80%

Exclude companies with S&P DJI ESG Scores in the bottom 25% of their GICS industry group globally.

Step 3:

Within the S&P 500, sort the remaining companies by their S&P DJI ESG Scores within each GICS industry group.

Step 4:

70% 60%

Target 75% by market cap

50%

40%

Sort by ESG score

Eligible

Starting from the company with the highest

30%

S&P DJI ESG Score, select companies for

inclusion from the top down, targeting 75% of

20%

the GICS industry group.

Step 5:

10%

Weight companies by float-adjusted market

Ineligible

capitalization.

0% Industry group

Source: S&P Dow Jones Indices LLC. Data as of December 2018. Chart is provided for illustrative purposes.

Top 75%

Eligible Stock with Low ESG Score

Low ESG Score in Global Peer Group

Tobacco

Controversial Weapons

Low UNGC Score

Overall, 154 constituents of the S&P 500 were excluded from the S&P 500 ESG Index, totaling 23.43% of the S&P 500 market capitalization as of December 2018.3 Exhibit 2 ranks the reasons behind these exclusions.

Exhibit 2: Reasons for Exclusion from the S&P 500 ESG Index

REASON FOR EXCLUSION

NUMBER OF EXCLUSIONS

Not Part of the Top 75% of Industry Group Market Cap

86

S&P DJI ESG Score in Bottom 25% of Industry Group Globally

54

Involved in Controversial Weapons

9

Involved in Tobacco Production or Sales

3

UNGC Score Too Low

2

Source: S&P Dow Jones Indices LLC. Data as of December 2018. Table is provided for illustrative purposes.

WEIGHT IN S&P 500 (%) 12.29 5.39 2.31 0.98 2.44

3 Companies added to the S&P 500 following the rebalance reference date of the annual rebalance are not eligible for the S&P 500 ESG Index until the subsequent annual rebalance of the S&P 500 ESG Index. These ineligible companies are not considered "exclusions." This is why the number of exclusions in Exhibit 2 is less than the difference in constituents between the S&P 500 and the S&P 500 ESG Index in Exhibit 4.

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The S&P 500 ESG Index

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The key criteria for constituent eligibility and selection in the S&P 500 ESG Index are the S&P DJI ESG Scores...

...which are based on data gathered through SAM's corporate sustainability assessment.

SAM, founded in 1995, was the world's first investment company focused on sustainable investment.

In 1999, SAM partnered with S&P DJI to launch the Dow Jones Sustainability Indices.

Constituent Selection and Weighting

Once the exclusions are made, the index constituents are selected in the following manner.

1. Companies are ranked by their S&P DJI ESG Score. 2. Within each GICS industry group, companies are selected from the

top down by S&P DJI ESG Score until 75% of the float-adjusted market capitalization of the S&P 500 GICS industry group is reached.

The index constituents are then weighted by their float-adjusted market capitalization. Using these rules, the index is rebalanced on an annual basis, after the close of trading on the last business day of April.4

S&P DJI ESG Scores

The key criteria for constituent eligibility and selection in the S&P 500 ESG Index are the S&P DJI ESG Scores. The S&P DJI ESG Scores are based on data gathered by SAM, a division of RobecoSAM, through SAM's Corporate Sustainability Assessment (CSA). The CSA is an annual evaluation of companies' sustainability practices, covering a wide range of industry-specific ESG criteria.

Data come from either the companies' responses to the CSA or research done by SAM on publicly available information for companies that do not fill out the CSA. A preliminary score is then calculated for each company as a weighted sum of a number of individual ESG indicators for each company, with each indicator corresponding to a different question in the CSA. The indicators are weighted to eliminate biases among different industries.

This preliminary score is then modified to account for differences that may exist between companies that complete the CSA (where information is provided directly by participating companies) versus companies that are assessed purely on the basis of publicly available information. In an effort to capture underreported or upcoming sustainability issues, the CSA methodology covers ESG indicators that may not be widely reported in the public domain. Scores are then normalized across individual indicators, and then once more at the final score level based on an "anchor" universe, defined as the combination of the S&P Global 1200 and the S&P Global LargeMidCap, resulting in the S&P DJI ESG Score (see Exhibit 3).

4 Please see the S&P ESG Index Series Methodology for more information on the S&P 500 ESG Index.

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The S&P 500 ESG Index

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When controversies unfold, SAM reviews them to consider whether the ESG score should be reduced...

...and then the S&P DJI Index Committee determines whether the company should be removed.

By selecting 75% of each industry group's market cap in the S&P 500, industry weights are closely aligned with those of the S&P 500...

...which allows the S&P 500 ESG Index to track the S&P 500 closely, while offering improved ESG performance across each industry group.

Exhibit 3: Description of S&P DJI ESG Scores

CHARACTERISTIC

Underlying Research Methodology

Calculation Agent

DESCRIPTION SAM CSA SAM ESG data, ratings, and benchmarking

Review Frequency Data Collection Question Scoring Question Weights Criteria Scoring Criteria Weights Dimension Scoring Dimension Weights Total ESG Score

Annually (with quarterly controversy updates)

Direct company participation through CSA or assessment of publicly available data by SAM analysts Aggregation of data points by predefined CSA methodology; unanswered questions are not scored Predefined CSA weights by SAM, based on financial materiality of sustainability topics to a specific industry Question scores are aggregated to a criteria score; weight of unanswered questions is redistributed among other questions within criteria Predefined CSA weights by SAM, based on financial materiality of sustainability topics to a specific industry Criteria scores are aggregated to a dimension score; if all questions in a criteria are unanswered, the weight of that criteria is redistributed among other criteria within a dimension (economic, environmental, and social) Dimension weights are always preserved according to the original SAM weighting scheme

Relative score calculated

Score Type

Relative (scores are normalized within assessed SAM industry)

Source: S&P Dow Jones Indices LLC. Data as of December 2018. Table is provided for illustrative purposes.

Controversies

When controversies unfold between annual rebalances of the S&P 500 ESG Index, SAM reviews these to consider whether a company's S&P DJI ESG Score should be reduced. The S&P DJI Index Committee overseeing the index then determines whether the company should be removed. Controversies monitored by SAM include those related to economic crime and corruption, fraud, illegal commercial practices, human rights issues, labor disputes, workplace safety, catastrophic accidents, and environmental disasters. Once a company is removed from the index, it is not eligible again for a full calendar year.

CHARACTERISTICS OF THE S&P 500 ESG INDEX

The methodology of the S&P 500 ESG Index is constructed to be simple, with straightforward exclusions and a selection process meant to keep the index's industry weights in line with those of the S&P 500. By virtue of selecting 75% of each GICS industry group's market capitalization in the S&P 500, industry weights are closely aligned with those of the S&P 500. This allows the S&P 500 ESG Index to track the S&P 500 closely (see Exhibit 4), while offering improved ESG performance across each industry group (see Exhibit 5).

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The S&P 500 ESG Index

April 2019

The composite ESG score of the S&P 500 ESG Index was 71.57, an increase of 9.32 compared with the S&P 500.

ESG score improvement is most appropriately measured at the industry level...

...and the average change in ESG score across industries was 11.07.

Exhibit 4: Fundamental Calculations of the S&P 500 ESG versus the S&P 500.

CATEGORY

S&P 500

S&P 500 ESG INDEX

Number of Constituents

Float-Adjusted Market Cap (USD Billions)

ANNUALIZED TOTAL RETURNS (%)

505 21,027

333 15,881

Five-Year

8.49

8.47

Three-Year

9.26

9.44

One-Year

-4.38

-3.95

EXCESS RETURNS (%)

Five-Year

-

-0.03

Three-Year

-

0.18

One-Year

-

0.43

ANNUALIZED RISK (%)

Five-Year

13.22

13.18

Three-Year

13.00

13.02

One-Year

17.00

17.09

REALIZED TRACKING ERROR (%)

Five-Year

-

0.80

Three-Year

-

0.72

One-Year

-

0.81

Source: S&P Dow Jones Indices LLC. Data as of December 2018. Past performance is no guarantee of future results. Table is provided for illustrative purposes and reflects hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations associated with back-tested performance.

The composite ESG score of the S&P 500 ESG Index was 71.57, compared with the S&P 500's score of 62.26, an increase of 9.32. This composite score is derived by converting each constituent's S&P DJI ESG Score into a z-score, calculating the weighted average of the z-scores within the index, and once again converting that weighted average into an S&P DJI ESG Score, using the cumulative distribution function with a mean of zero and a standard deviation of one.

S&P DJI ESG Scores are designed to be read as percentiles. A score of 70 means that company has a stronger score than 70% of the companies in that particular industry. A score of 62.26 means that the S&P 500 had a higher score than 62.26% of the companies in the broader universe. As a result, a score increase of 9.32 from the S&P 500 to the S&P 500 ESG is nearly 25% of the possible improvement that the index could have.

ESG score improvement is most appropriately measured at the industry level, as the S&P DJI ESG Scores are normalized by industry (see Exhibit 5). The average change in ESG score across industries was 11.07.

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The S&P 500 ESG Index

April 2019

The S&P 500 ESG Index tracks the S&P 500 closely...

...and it has done so, despite excluding more than 30% of constituents.

The S&P 500 ESG Index is designed to integrate ESG factors into core investments, while not straying far from the overall profile of the S&P 500.

Exhibit 5: Top 10 Industries (as Defined by SAM) by Overall ESG Score Improvement

INDUSTRY

S&P DJI ESG SCORE (S&P 500)

S&P DJI ESG SCORE (S&P 500 ESG INDEX)

CHANGE

Professional Services

52.18

86.03

33.86

Oil & Gas Upstream & Integrated

39.86

71.28

31.43

Aerospace & Defense

48.22

75.92

27.70

Energy Equipment & Services

61.91

87.31

25.39

Industrial Conglomerates

58.59

83.62

25.02

Hotels, Resorts & Cruise Lines

46.49

70.61

24.13

Airlines

57.25

80.80

23.54

Health Care Equipment & Supplies

51.78

73.62

21.85

Telecommunication Services

39.52

60.08

20.57

Communications Equipment

49.72

69.64

19.91

Source: S&P Dow Jones Indices LLC. Data as of December 2018. Table is provided for illustrative purposes.

Return Profile

The S&P 500 ESG Index tracks the S&P 500 closely, and it has done so despite excluding more than 30% of constituents based on the various eligibility criteria (see Exhibit 6). Realized tracking errors for the one-, three-, and five-year periods were consistently within 1%, and the index volatility was nearly identical to the S&P 500 over those same periods.

Exhibit 6: Historical Returns of the S&P 500 ESG Index versus the S&P 500

350

S&P 500

S&P 500 ESG Index

300

250

Returns

200

150

100

50

0

2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: S&P Dow Jones Indices LLC. Data as of December 2018. Past performance is no guarantee of future results. Chart is provided for illustrative purposes and reflects hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations associated with back-tested performance.

CONCLUSION

The S&P 500 ESG Index is designed for investors wishing to integrate ESG factors into their core investments, while not straying far from the overall profile of the S&P 500.

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The S&P 500 ESG Index

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APPENDIX: CONSTITUENTS OF THE S&P 500 NOT SELECTED FOR THE S&P 500 ESG INDEX

Exhibit 7: Constituents of the S&P 500 Not Selected for the S&P 500 ESG Index

COMPANY

REASON FOR EXCLUSION

Boeing Co

Ineligible; involved in controversial weapons

Honeywell Intl Inc

Ineligible; involved in controversial weapons

Lockheed Martin

Ineligible; involved in controversial weapons

General Dynamics

Ineligible; involved in controversial weapons

Raytheon Co

Ineligible; involved in controversial weapons

Northrop Grumman Corp

Ineligible; involved in controversial weapons

Textron Inc

Ineligible; involved in controversial weapons

Huntington Ingalls Industries Inc.

Ineligible; involved in controversial weapons

Fluor Corp

Ineligible; involved in controversial weapons

Philip Morris International

Ineligible; involved in tobacco production or sales

Altria Group Inc

Ineligible; involved in tobacco production or sales

Eastman Chemical Co

Ineligible; involved in tobacco production or sales

Berkshire Hathaway B

Ineligible; UNGC score too low

Netflix Inc

Ineligible; UNGC score too low

Home Depot Inc

Ineligible; S&P DJI ESG Score in bottom 25% of GICS industry group

Walgreens Boots Alliance Inc

Ineligible; S&P DJI ESG Score in bottom 25% of GICS industry group

Intuitive Surgical Inc

Ineligible; S&P DJI ESG Score in bottom 25% of GICS industry group

Stryker Corp

Ineligible; S&P DJI ESG Score in bottom 25% of GICS industry group

Deere & Co

Ineligible; S&P DJI ESG Score in bottom 25% of GICS industry group

Illumina Inc

Ineligible; S&P DJI ESG Score in bottom 25% of GICS industry group

Intercontinental Exchange Inc

Ineligible; S&P DJI ESG Score in bottom 25% of GICS industry group

Analog Devices Inc

Ineligible; S&P DJI ESG Score in bottom 25% of GICS industry group

Allstate Corp

Ineligible; S&P DJI ESG Score in bottom 25% of GICS industry group

Roper Technologies, Inc

Ineligible; S&P DJI ESG Score in bottom 25% of GICS industry group

Moody's Corp

Ineligible; S&P DJI ESG Score in bottom 25% of GICS industry group

Pioneer Natural Resources

Ineligible; S&P DJI ESG Score in bottom 25% of GICS industry group

Digital Realty Trust

Ineligible; S&P DJI ESG Score in bottom 25% of GICS industry group

Zimmer Biomet Holdings Inc

Ineligible; S&P DJI ESG Score in bottom 25% of GICS industry group

Concho Resources Inc

Ineligible; S&P DJI ESG Score in bottom 25% of GICS industry group

PACCAR Inc

Ineligible; S&P DJI ESG Score in bottom 25% of GICS industry group

Fortive Corp

Ineligible; S&P DJI ESG Score in bottom 25% of GICS industry group

Monster Beverage Corp New

Ineligible; S&P DJI ESG Score in bottom 25% of GICS industry group

SBA Communications Corp

Ineligible; S&P DJI ESG Score in bottom 25% of GICS industry group

Verisk Analytics Inc

Ineligible; S&P DJI ESG Score in bottom 25% of GICS industry group

TransDigm Group

Ineligible; S&P DJI ESG Score in bottom 25% of GICS industry group

Omnicom Group

Ineligible; S&P DJI ESG Score in bottom 25% of GICS industry group

American Water Works Co Inc

Ineligible; S&P DJI ESG Score in bottom 25% of GICS industry group

Source: S&P Dow Jones Indices LLC. Data as of Dec. 31, 2018. Table is provided for illustrative purposes.

WEIGHT IN S&P 500 (%) 0.81 0.47 0.31 0.21 0.21 0.20 0.05 0.04 0.02 0.49 0.44 0.05 1.89 0.56 0.92 0.26 0.26 0.23 0.23 0.21 0.20 0.15 0.14 0.13 0.11 0.11 0.10 0.10 0.10 0.09 0.09 0.09 0.09 0.09 0.08 0.08 0.08

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